Suppose there are only two automobile companies, Ford and Chevrolet. Ford believes that Chevrolet will match any price it set, but Chevrolet too is interested in maximizing profit. Use the following price and profit data to answer the following question.
Ford's Selling Price Chevrolet's Selling Price Ford's Profits (Millions) Chevrolet's Profits
(millions)
$4,000 $4,000 $8 $8
4,000 8,000 12 6
4,000 12,000 14 2
8,000 4,000 6 12
8,000 8,000 10 10
8,000 12,000 12 6
12,000 4,000 2 14
12,000 8,000 6 12
12,000 12,000 7 7
a. What price will Ford charge?
b. What prices will Chevrolet charge once Ford has set is price?
c. What is Ford's profit after Chevrolet's response?
d. If the two firms collaborated to maximize joint profits, what price would they set?
e. Given your answer to part (d), how could undetected cheating on price cause the cheating firm's profit to rise?